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Module 01 Development & Development Policy Changes
Presentation Script
Frontiers of Development Policy
Page 1 of 36
Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
Development & Development
Welcome to the module on Development and Development Policy
Challenges.
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
In this module:
Sustained economic growth is the most critical factor in alleviating
poverty, although the rate of poverty reduction differs from country to
country and also depends upon the initial level of income inequality, the
growth of inequality over time, the pattern of growth, and where that
growth is concentrated. Economic growth in developed and developing
countries will be our focus in this module. We will examine the growth
experience prior to and after the financial crisis of 2008, and we will look
at how economic growth can be made more inclusive.
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
Developing countries: trend output remains de-coupled
Economic growth theory suggests catch up potential for developing
countries as they advance toward the high income efficiency frontier.
This assumes that pre-conditions for such growth catch up are largely in
place, including the realms of macroeconomics and institutions. In this
chart, we have the potential and cyclical components of GDP growth for
developing countries as a whole and advanced economies or high-income
countries. Potential, represented by the smoother lines in the chart,
captures underlying longer-term growth potential, while the cyclical
component, represented by the more volatile lines, captures how growth
tends to change (temporarily) over the economic cycle, with upturns and
downturns.
It can be seen from the chart that, while underlying growth in developing
countries has persistently diverged from, and generally far exceeded,
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
underlying growth potential in high-income countries, the transitory
cyclical components of growth in both co-move more closely. The main
message is that developing countries have, over the past 50 years,
generally had higher underlying growth potential than high-income
countries, as might be expected from growth theory and the room for
catch up, but that growth co-moves within each business cycle. During
the recent crisis, and true to past patterns, the cyclical component of
growth in emerging countries has co-moved with that of high-income
countries, but underlying growth potential has remained higher in
developing countries.
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
Continued better GDP growth in developing regions
This gap in output is stark from 2006 as we can see in this chart, with
developing countries, especially in Asia, outstripping high-income growth
for Japan, the US, the UK and the Euro Zone.
What are the reasons behind these differing growth experiences, and
what does it mean for the future? It is quite likely to related to underlying
improvements in developing country fundamentals-and the opposite in
high-income countries. We will look at these improvements in developing
countries during the remainder of this module.
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
Factors behind growth record
What explains the differing growth series in the two previous charts? In
particular, what explains the consistently higher growth potential of the
developing countries, even after the great recession? How do we account
for the faster recovery in the developing regions, and here we include not
just China and India, Brazil and Turkey, but also those lower income
countries that have not faced political instability and have managed to
keep growing?
We suggest two inter-related reasons. The first is the structural change
that is taking place in the global economy, and the second is what we
categorize as a super economic global cycle that reached its apex in 2007
and has undergone a downward phase since then.
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Module 1: Development & Development Policy Changes Presentation Script
Global structural change
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Module 1: Development & Development Policy Changes Presentation Script
Super Economic global cycle
In addition to the structural change, there was the ascent and decline of
the global economy, characterized by a long and strong process of
leveraging of private portfolios in advanced economies, followed by a
process through which financial fragilities were built. The ascent was
marked by financial innovations and high levels of consumption based on
indebtedness and rising real estate values on the assets side. The nature
of this allowed the advanced economies to grow beyond potential while
making available an outlet space for increasing exports from Asia which
fed into increased global demand for natural resources, including higher
oil prices. This led to global imbalances, involving both the US and Europe
as the following two slides show.
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
External imbalances
Here you can see the external current account imbalances across major
economic areas since 2000 with projections out to 2015. (It can be seen
that the World Sum line is rarely at zero, which means that there are
errors in some of the underlying measures. These total errors have,
however, narrowed considerably since 2000.)
What are the main patterns that we can see? First, the advanced country
G-20 member deficits, represented by the red bars, increased steadily
through 2008 and the sharp escalation of the global financial crisis after
Lehman. The counterpart was increased oil exporter and G-20 emerging
market surpluses. Since then, the advanced G-20 country deficits have
narrowed sharply, mainly on account of lower growth in these countries,
which tends to lower the value of their imports. The counterpart this
time has been a reduction in the current account surpluses of oil
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exporters and G-20 developing countries. With growth resuming in
advanced G-20 countries, external imbalances could, however, widen,
and there is no guarantee that global external imbalances have been
dealt with decisively.
Current account balance
A similar pattern took place in the Euro Zone. Since the inception of the
Euro Zone in 1999, the external current account deficits of Greece,
Ireland, Portugal, and Spain increased steadily through the crisis. The
counterpart was a steady increase in Germany's external current account
surpluses.
As in the previous slide, there has been a reversal of this pattern since
the crisis, with the external deficits of Greece, Ireland, Portugal, and
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Module 1: Development & Development Policy Changes Presentation Script
Spain narrowing sharply after 2008 as growth and imports have fallen
and the fall of the German surplus.
Economic global cycle
Prior to the crisis, both public and private sector debt increased in both
Europe and the US. Since the crisis onset in 2007 and particularly since
the collapse of Lehman Brothers in late 2008, both Europe and the US
have deleveraged, or run down their debt, on the private sector side, but
with the public sector offsetting the economic impact of this by initial
expansionary policies and running up public debt.
On the public side, so far the U.S. Treasury can finance its high debt by
borrowing from investors at low interest rates, so the key issue driving
the need for austerity has stemmed from political, rather than economic,
pressures. In Europe, public debt has also increased, but only core
European countries have been able to continue borrowing at low interest
rates. Others, including the crisis cases, have seen interest rates increase
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Module 1: Development & Development Policy Changes Presentation Script
markedly, forcing earlier fiscal austerity and tightening. Also in Europe, in
some countries, weakened banking sectors ended up being rescued by
government, adding to public debt burdens and further intensifying the
crisis.
Pre-crisis and post-crisis output in advanced economies
Recovery from deep financial crises tends to be slow and protracted. This
latest deep financial crisis is no exception.
As in past deep financial crises, economic recovery in advanced
economies has been sluggish. Added to this in Europe are the difficulties
associated with the ongoing fiscal austerity programs and banking
problems. Reflecting this, and as seen in the chart, advanced economies
have not recovered their loss of output, which looks likely to be
permanent, and growth is now somewhat lower than before the crisis.
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Module 1: Development & Development Policy Changes Presentation Script
There is a permanent gap between the pre-crisis October 2007 WEO
growth projections and the mid-crisis growth projection. Growth
projections for advanced countries have worsened since then, meaning
that the slope of the solid line is now shallower, implying lower medium-
term growth.
Recovery in advanced economies a vicious cycle
In effect, there is a vicious cycle at play.
Briefly, the fiscal and debt problems in many high-income countries pose
risks to the public sector that could translate into plunging financial
markets (e.g., bond and stock markets), heavy losses for investors, and
public borrowing needs that some countries cannot meet without
outside financial support, in part because of weak banks who are now
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Module 1: Development & Development Policy Changes Presentation Script
less willing to extend credit to public and private counterparts. This credit
squeeze, in turn, lowers economic growth that, in turn, leads to higher
unemployment, lower household spending, lower investment by firms,
increased savings to run down debt, and a vicious low-growth fiscal circle.
Toward a switchover of locomotives in the global economy
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Module 1: Development & Development Policy Changes Presentation Script
Growth prospects in developing countries
Continuing from the chart mentioned in the video, we suggest some
sources of growth.
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Module 1: Development & Development Policy Changes Presentation Script
Growth prospects in developing countries continued
We note that there is a low degree of leverage, for example balance
sheets, both public and private, that are in good shape in developing
countries as a whole. So there's scope for investment. For example, if
appropriate regulations are made for the proper appropriation of social
returns from investment in infrastructure, there's enough fiscal space to
make such investment economically viable.
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Module 1: Development & Development Policy Changes Presentation Script
Growth prospects in developing countries continued
Secondly, there are opportunities for technological convergence. The
scope for this has been made easier where developing countries have
incorporated supportive policies in education, the regulatory framework,
and infrastructure. Even if the advanced economies remain stagnant at
the frontier, there is continued scope for developing countries to catch-
up. The advantage of the late-comer is very real.
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Module 1: Development & Development Policy Changes Presentation Script
Growth prospects in developing countries continued
Third, for the first time, we may be witnessing a new dynamic with social
trickle-down of growth and rising middle classes.
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Module 1: Development & Development Policy Changes Presentation Script
Growth prospects in developing countries continued
Fourth, developing countries present many opportunities for trade,
structural change, and global rebalancing of demand and supply.
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Module 1: Development & Development Policy Changes Presentation Script
Developing countries are driving world trade
We note that many developing countries, particularly large countries in
Latin America and Asia, have had problems with industrialization in the
past.
In particular, the import substitution policies implemented by many Latin
American countries had well-known shortcomings, including lack of
competition, small domestic markets in some cases that didn't have the
scope for efficiencies that come with size, the wrong industries being
chosen to protect, and so on.
The Asian experience was better, but still did not match the
industrialization takeoff in Western Europe after World War II, where
industrialization was influenced by recovery after war, rapid
technological convergence, and the emergence of a large middle income
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group with corresponding mass consumption. However, as we noted, we
may be watching a similar movement now across developing countries as
a whole, as seen by the increased slopes of the lines in the left chart,
which show various measures of the increased shares of developing
countries in global trade. Developing countries also are now importing
more as their income increases, as seen in the chart on the right. It shows
that high-income shares in world imports has fallen sharply, and
developing country shares in world imports has, in contrast, risen sharply.
Natural resources as a blessing or a curse
Finally, we look at natural resources and whether they are a blessing or a
curse for economic growth.
The so-called resource curse refers to the counterintuitive finding that
countries with plenty of natural resources tend to suffer lower economic
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growth than countries with fewer natural resources. The major lesson
from the vast literature on the so-called resource curse is that reliance on
natural resources, even with high resource prices, can bring with it
problems that retard growth, including loss of competitiveness (the so-
called Dutch Disease), volatile public revenues as resource prices tend to
move about a lot, governance problems, and income inequality.
Looking ahead, and focusing on the higher commodity prices of late in
the chart, albeit with modest projected softening in the medium term,
there are grounds for hope that this resource curse may be addressed in
light of improved underlying economic fundamentals in developing
countries.
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Module 1: Development & Development Policy Changes Presentation Script
Recap
We have a structural transformation taking place in the global economy
as witnessed by the growth in South-South trade and technological
improvements in developing countries. This structural change keeps on
happening, even as advanced economies linger with the legacy of their
own crisis. The major hope for the restoration of economic growth lies
with developing countries, as advanced economies do not look capable of
putting their house in order. This switchover of locomotives' is also
underpinned by some good news in developing economies, as a whole,
such as decreasing poverty and higher degrees of self-reliance. Of course,
this is not written in stone, but there are grounds for optimism,
particularly as developing economies have made huge strides in
implementing appropriate policies for growth and development and
show no attempt to change these.
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Key Message for Development and Development Policy
One of the key messages is that a rapid pace of growth is unquestionably
necessary for substantial poverty reduction and income growth. We refer
to this as the pursuit of inclusive growth,' or IG. It is concerned with both
the pace and pattern of growth and emphasizes the importance of
extensive and intensive growth.
A rapid pace of growth can be achieved through extensive growth, which
requires capacity expansion. In order to sustain this, there must be
periods when growth is intensive and accompanied by productivity
improvements and innovation. Thus, issues of structural transformation
rise to the fore. Inclusive growth takes a long-term perspective.
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Definition of Inclusive Growth
Now let's examine what we mean by the term inclusive growth' and how
we might craft related policies.
In order for inclusive growth to be sustainable in the long run, it should
be (1) broad-based across sectors, and, (2) inclusive of the large part of
the country's labor force. Inclusiveness refers to equality of opportunity
in terms of access to markets and resources, and an unbiased regulatory
environment for businesses and individuals.
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When Growth is Inclusive
Growth is inclusive when it is absolute pro-poor growth, or when the
poor benefit in absolute terms from economic growth. Thus, a society
aiming for absolute pro-poor growth would favor an outcome of 6
percent average growth even if the poor's incomes grew by 4%. Absolute
pro-poor growth can be the result of direct income redistribution
schemes, but for growth to be inclusive, productivity must be improved
and new employment opportunities created. Inclusive growth looks at
ways to raise growth by using more fully the parts of the labor force that
are trapped in low-productivity activities.
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Module 1: Development & Development Policy Changes Presentation Script
Key differences between absolute pro-poor growth and IG
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Crafting IG strategies
Here are some of the areas one should target when crafting inclusive
growth strategies.
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Crafting IG strategies continued
We begin by targeting distortions and note that numerous distortions
exist at any time in a given country with varying degrees of importance. It
would be impossible to target all distortions, so one should target the
distortion with the largest direct welfare impact.
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Crafting IG strategies continued
Our main instrument for inclusive growth is productive employment, and
this should be targeted for inclusive growth. There is no bias in favor of
labor-intensive policies. What we need is productive employment; thus,
inclusive growth makes a distinction between self- and wage-employed,
employment by sector and size of firm, labor movements across sectors
and geographic areas, and movements from low to high productivity
sectors.
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Module 1: Development & Development Policy Changes Presentation Script
Crafting IG strategies continued
We focus on fundamentals for growth, by which we mean a stable
macroeconomic environment, enforcement of property rights, openness
and effective government in crafting IG strategies, and an understanding
that these fundamentals interact differently with existing policies and
institutional setups in different countries.
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Crafting IG strategies continued
We focus on the individual as an economic actor and examine the factors
pertaining to labor demand and supply for the individual.
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Crafting IG strategies
Finally, we need to be mindful of the future constraints to growth that
may not be binding today but that may need to be addressed now in
order to achieve good future outcomes.
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Frontiers of Development Policy
Module 1: Development & Development Policy Changes Presentation Script
Summary
The main message that arises from our consideration of how we might
craft policies for inclusive growth is that these policies must be country-
specific.
We know that the impact of policies for growth are highly dependent on
initial conditions, such as levels of income, poverty and asset inequality,
geography, demography, governance, politics, and the set of existing
policies. We know also that these characteristics differ across countries
and over time within the same country. Thus, policies for inclusive
growth need to be tailored to a country at a specific point in time.
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Summary continued
We consider three different types of economies in this slide and note the
form that policy for IG should take. For example, in situations of high but
jobless growth, strategies should focus specifically on inclusiveness, or,
more specifically, on equality of opportunity for individuals and
employability.
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Module 1: Development & Development Policy Changes Presentation Script
Conclusion
You have reached the end of this module. You can continue learning by
accessing the next module.
Frontier cover module 1Module 1